Breaking: Markets sell off. Overdone or more to come?

Market volatility resumes after US-China trade truce was announced at G20 Summit. Is this just short-term gyration or part of a longer downward trend? Kim Parlee talks with Michael Craig, Senior Portfolio Manager, TD Asset Management.

Michael, let's start with the selloff that we saw on the markets. Fairly deep, big plunge. I mean, The Wall Street Journal I know had a headline. They were talking about trade anxiety and economic growth anxiety. What happened yesterday?

I think it was a confluence of a few things. Expectations for the optimism after G20 faded after people started looking at the details. There has been a tremendous short in the bond market that got unwound yesterday. So bonds rallied amazingly.

And broadly speaking, there was a lot of systematic selling yesterday that just overwhelmed the brokerage industry. So there's no economic data that came out yesterday that would support this. It was very much one of those random selloffs. And it's really in tune with what we've been witnessing over the last few months, where we've had a lot of volatility. But, broadly speaking, stock markets haven't gone anywhere. I mean, they're certainly off the highs. But I think we were chatting a few months back. And I think we're about 50 points higher today than we were then. So not exactly a pleasurable experience. Far more volatility than return. But not unexpected in a kind of global growth slowdown.

I guess, and that's probably, I think, the big concern people have is that the G20 happened. People were feeling, I wouldn't say great, but OK. And then you get some tweets from the president that seem antagonistic, talking about tariffs and those types of things. So should we just expect there to be this kind of volatility going forward based on this 90-day ceasefire between the US and China?

Yeah. So there's two things I think. One that really matters. And one that's a much longer story. The US-Chinese trade tensions is not going away. It's not going away in 90 days. It's not going away next year. This is a very, very complex negotiation. And it spans various types of technology, growth aspirations, et cetera. And so this will be with us for some time.

But on the more here and now, our work would have suggested that in September we started to see a slowdown in global growth. That has played out in various markets. And what you've seen now is you're starting to see responses from various central banks.

So last week Powell was speaking and really walked back expectations for hikes next year. So now we're actually only pricing in two hikes for the next 12 months in the US.

Today Bank of Canada, also who was very hawkish in October, now have walked that all back and have been very dovish. And we're only pricing I think sub two hikes for next year. And I would say probably just one. And so the central banks have reacted to this slower growth by bringing back expectations for hikes, which will mean easier financial conditions, and ultimately will be supportive for equities over the next 12 months.

So what do you do? I mean, how are you seeing the markets as we move forward then?

So short term we're a little bit cautious. We've certainly been looking at ways to, ultimately, invest in this range. And we're going to see how this bottoms. Ultimately, we want to see a bottoming of growth expectations before we get bullish again. So we've really dialed back our risk somewhat.

The nice thing from my perspective is that earlier this year we saw both bonds and equities selling off, which is a very challenging environment. Now, at least, we're starting to see some diversification come back, where days when the stock market sells off, the bond market rallies. For example, yesterday bonds were up anywhere from $0.50 to 1%. So a much better environment for bond investors.